Simply Good Foods Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2024

Key Takeaways

  • Net sales increased 17.2% in Q4 to $375.7 million, with adjusted EBITDA up 15% year-over-year to $77.5 million; full-year net sales were $1.33 billion (+7.1%) and adjusted EBITDA $269.1 million (+9.6%).
  • Quest retail takeaway grew 9–10% in Q4 despite temporary chips supply constraints (chips POS +34%), and two new chips lines plus a full-year “It’s Basically Cheating” marketing campaign position Quest for ~9–10% retail takeaway growth in fiscal 2025.
  • Atkins retail takeaway declined 8% in measured channels (-5% combined) but saw 15% e-commerce growth; a revitalization plan with new RTD shakes, wafer bars, candies, refreshed packaging and advertising is underway, although full-year fiscal 2025 takeaway is expected to decline high single digits due to planned spend cuts and some distribution losses.
  • The Owen acquisition integration is progressing as planned, with strong POS and distribution growth; full-year fiscal 2025 net sales are projected at $135–145 million (+20–30%), and the majority of synergies will materialize in fiscal 2026, driving high-to-mid-teens EBITDA margins.
  • For fiscal 2025, the company forecasts reported net sales growth of 8.5–10.5% (4–6% on a comparable basis) and adjusted EBITDA growth of 4–6%, despite an expected ~200 bps gross margin headwind from input cost inflation, as it invests in innovation, marketing and expanded availability.
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Earnings Conference Call
Simply Good Foods Q4 2024
00:00 / 00:00

There are 9 speakers on the call.

Operator

Ladies and gentlemen, good morning, and welcome to the Simply Good Foods Company Fiscal 4th Quarter 20 24 Conference

Speaker 1

Call.

Operator

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Pogarian, Vice President of Investor Relations. Please go ahead, sir.

Speaker 2

Thank you, operator. Good morning. I'm pleased to welcome you to the Simply Good Foods Company 4th quarter earnings call. Note that fiscal Q4 and full year amounts reflect results for the 14 and 53 weeks ended August 31, 2024. Jeff Tanner, President and CEO and Sean Maurer, CFO will provide you with an overview of results, which will then be followed by a Q and A session.

Speaker 2

The company issued its earnings release this morning at approximately 7 am Eastern Time. A copy of the release and presentation slides are available under the Investors section of the website at www.simplygoodfoodscompany.com. This call is being webcast and an archive of today's remarks will also be available. During the course of today's call, management will make forward looking statements as subject to various risks and uncertainties that may cause actual results to differ materially. The company undertakes no obligation to update these statements based on subsequent events.

Speaker 2

A detailed listing of such risks and uncertainties can be found in today's press release and the company's SEC filings. Note that on today's call, we will refer to certain non GAAP financial measures that we believe will provide useful information for our investors. Due to the company's asset light strong cash flow business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. Please refer to today's press release for a reconciliation of the historical non GAAP financial measures to the most comparable measures prepared in accordance with GAAP. The acquisition of Owen was completed on June 13, 2024.

Speaker 2

Therefore, the company's Q4 and full year 2024 results include about 11 weeks of Owen performance. The reference to legacy Simply Good Foods encompasses Simply Good Foods business excluding Oen. I'll now turn the call over to Jeff Tanner, President and CEO.

Speaker 3

Thank you, Mark. Good morning. Thank you for joining us. Today, I'll recap Simply Good Food's financial results and the performance of our brands. Then Sean will discuss our financial results in more detail before we wrap it up with a discussion of our fiscal 2025 outlook and your questions.

Speaker 3

We're pleased with our fiscal 4th quarter financial results with net sales increasing 17.2%. The acquisition of Owen in the 53rd week are a 9 8 percentage point contributor to growth. On a like for like basis, North America Quest net sales increased about 5% and Atkins declined about 5%. Quest performance was less than expected due to temporary chip supply constraints and Atkins was in line with our estimate. Our gross margin improvement continued in the 4th quarter and resulted in adjusted EBITDA of $77,500,000 an increase of 15% compared to the year ago period.

Speaker 3

Total Simply Good Foods retail takeaway, including Owen and the combined measured and unmeasured channels, was about 8% for both the Q4 and full fiscal year 2024 periods. Quest and Owen full year POS was about 13% 80% and Atkins was off 5%. Importantly, nutritional snacking category growth remains strong driven by volume. Key sub segments of the category including bars, shakes and chips all increased in both Q4 and full year fiscal 2024. We are category advisor at most retailers and will continue to work with our customers to develop and support initiatives in the aisle to further accelerate category growth.

Speaker 3

Given the twin tailwinds of snacking and health and wellness as well as low household penetration, the category is expected to maintain its momentum and its multi year growth trajectory. As we look to fiscal 2025, we're excited about the prospects for our category and our business, and we believe we are well positioned to deliver on our objectives. We'll execute against our strategic initiatives, focusing on innovation, marketing and increased physical availability that we expect will drive trial and increase household penetration. The Owen acquisition closed early in Q4 and the integration work is progressing as planned. We continue to be very pleased with this brand and believe the combination of our two businesses will create future significant shareholder value through revenue growth, margin expansion and cost synergies.

Speaker 3

Sean will provide you with the details of our fiscal 2025 outlook, but assuming a comparable full year of Owen results are included in fiscal 2024 as well as the exclusion of the 53rd week in fiscal 2024. Fiscal 2025 is expected to be in line with the company's long term algorithm. Specifically, net sales growth in the 4% to 6% range and adjusted EBITDA growth slightly greater than the net sales increase. The next slide provides you with a perspective of nutritional snacking category growth as well as our retail takeaway performance within the IRI, new low plus C store universe and in the combined measured and unmeasured channels. Nutritional snacking category Q4 growth in the measured channels was 7.3%, driven primarily by volume.

Speaker 3

The category continues to be a standout performer and is increasingly a focus of our retail partners as they look for growth opportunities. Quest and Owen retail takeaway and measured channels increased about 9% 112% and outpaced the category. Atkins performance down about 8% in measured channels was similar to last quarter. Our e commerce business continues to do well. As a result, retail takeaway and unmeasured channels is nearly 2 percentage points additive to total Simply Good Foods measured channel POS.

Speaker 3

Let me now turn to Quest. In Q4, retail takeaway growth in measured and combined measured and unmeasured channels was 9% 10%. Consumption slowed versus Q3, primarily due to temporary chips capacity constraints that resulted in stockouts at retailers. Additionally, we saw some increased competitive distribution and promotions in the bar category. In Q4, we estimate total unmeasured channel retail takeaway increased about 16%, driven by strong e commerce growth of 21% that was nearly 4.50 basis points greater than Q3.

Speaker 3

E commerce strength was partially offset by softness in specialty channels. Quest Snacks and Bars retail takeaway in the combined measured and unmeasured channels increased about 17% and 1% respectively. Despite the chips supply challenges, we continue to be pleased with our salty snacks POS growth of 34%, which is a standout in the category and represents about 25% of Quest retail sales. Chip's retail takeaway slowed during the quarter due to temporary capacity constraints that impacted our ability to keep retail shelves fully stocked. We brought on a second chips manufacturing line during the quarter, and it took some time to get up the learning curve.

Speaker 3

As we exit the Q1 in November, we anticipate supply will be back to normal with now 2 chips production lines. This positions us well for the upcoming New Year, New Year season and any new distribution wins. Our segment competition increased driven by distribution of some new entrants into the measured channel universe. In response, we will increase promotional activity at select retailers starting in Q1 of fiscal 2025, and we have accelerated the launch of the Quest Overload Bar platform to February. These bars are loaded with inclusions and have a unique texture and mouthfeel that will bring variety, news and excitement to the bar segment.

Speaker 3

Therefore, in fiscal 2025, we expect that Quest will have another strong year driven by volume that should result in retail takeaway growth of 9% to 10%. As I mentioned earlier, chips recovery has already begun. With 2 production lines, we have the flexibility to meet increased demand for this fast growing business. In the Q4 of fiscal 2024, we partnered with a large club customer on a small regional trial of Quest chips. Due to the success in the second half of fiscal twenty twenty five, we'll have a broader nationwide test with this retailer that could lead to an expanded presence.

Speaker 3

At the bottom of this slide, you'll note images of the key innovation items in fiscal year 2025 that I just discussed. Additionally, the rollout of the Bakeshop line began in late fiscal 2024. It is ongoing and while early is progressing nicely and in line with our estimates. Importantly, Quest's core products and innovation will be supported with a full year marketing campaign. Recall the successful It's Basically Cheating advertising debuted in mid March and drove an almost immediate lift in consumption, particularly chips as this is where a large portion of the advertising was focused.

Speaker 3

In fiscal 2025, we will have a full year benefit of the campaign at even higher media rates, which we expect will drive greater awareness and household penetration of all Quest products. Turning to Atkins. Q4 retail takeaway in measured and combined measured and unmeasured channels was off 8% 5%. Strong e commerce growth continued driven by Amazon whose POS growth was 15%. In Q4, Action's retail dollar sales were relatively consistent.

Speaker 3

Specifically, during the last 11 weeks of Q4, average weekly dollars in measured channels was $10,600,000 and very similar on a week to week basis. This was partially due to RTD shakes, where retail takeaway improved and was about the same as a year ago period in the combined measured and unmeasured channels. We continue to believe in the long term vitality of the brand given the renewed cultural relevance and conversation on weight, and we are confident we have the right plans in place to bring Atkins back to growth. I'm pleased with the execution of the Atkins revitalization plan that is progressing as scheduled. Some elements of the plan are in market now and we expect all elements to be in the market as we exit fiscal year 2025.

Speaker 3

While early, the innovation rolling out in the marketplace in conjunction with the full shelf resets is tracking to our estimates. We have a full suite of innovation across forms, including the Atkins Strong ready to drink 30 gram protein shake, a new wafer bar and Atkins Indulge Confectionery Gummy Bears and Truffles. Our innovation enabled us to maintain distribution at key food and mass customers. However, we do anticipate that some items in the more space constrained club channel could be at risk in the spring shelf resets. Product upgrades or reformulation work is progressing as well as new packaging.

Speaker 3

The Atkins Strong Shake packaging is an indication of what you'll see. Note the fresh new look including a bold A in the middle as our new more modern logo. More to come here soon. As we exited fiscal 2024, new Atkins advertising was on air and the actins.com website was refreshed. If you haven't seen it, the revised advertising, 1, more clearly communicates and owns the benefit of weight management 2, more strongly communicates the brand's unique macronutrient profile focused on weight and 3, emphasizes actions as a sustainable and diet free eating approach to weight wellness.

Speaker 3

We believe this messaging links better to the evolving consumer views and conversation on weight wellness. Notably, one of the spots specifically positions Atkins as a diet free and sustainable way for GLP-one users or anyone who has lost weight to hold on to their gains. The refreshed atkins.com website has been contemporized and is user friendly. As has always been the case, it is loaded with customizable tools to help consumers achieve their weight wellness goals. While we work on revitalizing the brand, we also recognize the need to ensure Atkins is a long term sustainable business.

Speaker 3

As such, beginning in fiscal 2025, we will work to optimize ROI and investment levels, specifically eliminating trade and marketing investments that don't meet specific ROI hurdles. This will impact fiscal 2025 sales growth we expect some volume declines due to the reduction in spending as well as some distribution losses. We'll also discontinue our breakeven Canada export business. As such, we anticipate Adkins full year fiscal 2025 retail takeaway to decline high single digits, half of which is due to the aforementioned planned lower spend. To conclude, we're making progress and positioning the brand to succeed in the future.

Speaker 3

However, as we have previously stated, it will take some time to get there. Turning to Owen. This brand continues to deliver on the potential we envisioned. Retail takeaway in the measured and unmeasured channels is strong with both distribution and velocity growth. Assuming a full year of Owen operations, Q4 and full fiscal year 2024 net sales and retail takeaway are relatively in line with each other.

Speaker 3

And it's not one customer or channel. Owen Growth has significantly accelerated across all major retail customers. In the measured channel universe, Owen is the 3rd largest sports nutrition multipack brand in the U. S. And growing the fastest in dollar sales.

Speaker 3

We remain confident in our ability to effectively integrate Owen into our business and deliver on the acquisition model commitments. In 2024, Owen benefited from increased distribution into new customers. With solid ACV in fiscal 2025, we expect POS growth of 20% to 30% driven by higher velocities and increased items or SKUs at select retailers. As such, in fiscal 2025, we expect Owen net sales to be in the $135,000,000 to $145,000,000 range, also a 20% to 30% increase versus the last year. The integration work is underway and progressing as planned.

Speaker 3

As a reminder, to align with our fiscal year end 2025, we will achieve the majority of the synergies, about 80% at the onset of 1st day of fiscal 2026. This should result in Owen's fiscal 2026 adjusted EBITDA margin of hightomid10. To summarize, Simply Good Foods is uniquely positioned as a 1,400,000,000 dollars net sales leader in the nutritional snacking category with a diversified portfolio across brands and product forms. The relevance of the category and demand for our products only continues to increase as more and more consumers turn away from high carb, high sugar food, seeking high protein, low sugar, low carb options. We believe our category and our brands represent the future of food and beverage and we have 3 uniquely positioned brands that are aligned around these consumer megatrends.

Speaker 3

Consumers trust our brands to help them achieve their wellness goals. As such, we're focused on our innovation and marketing plans to provide consumers with products to help them in their journey. We will continue to execute our strategic priorities that we expect will enable us to deliver on our long term growth objectives that ultimately drive increased shareholder value. The work we're doing in fiscal 2025 positions us well for fiscal 2026, which should enable us to achieve results at the high end of our long term algorithm. Now I will turn the call over to Sean, who will provide you with some greater financial details.

Speaker 4

Thank you, Jeff, and good morning, everyone. I will begin with an overview of our net sales. Total Simply Good Foods 4th quarter net sales of $375,700,000 increased 17.2% versus the year ago period. The primary drivers of growth were the Owen acquisition and the 53rd week that were about a 9 and 8 percentage point benefit respectively to net sales growth. Legacy net sales growth excluding the extra week increased about 1%.

Speaker 4

Full year net sales of $1,330,000,000 increased 7.1% versus the year ago period. Owen was a 2.4 percentage point contribution to net sales growth. Legacy net sales increased 4.8%, including the benefit of the 53rd week that was slightly less than a 2 percentage point benefit. As we exited fiscal 2024, retail inventory returned to normal levels, but slightly below the fiscal 2023. The reduction in retail inventory levels combined with additional incremental trade investments resulted in full year legacy retail takeaway slightly greater than net sales.

Speaker 4

Moving on to other P and L items for the quarter. Gross profit was $146,000,000 an increase of $25,500,000 from the year ago period, driven by lower legacy business ingredient and packaging costs, partially offset by a non cash $3,200,000 inventory purchase accounting step up adjustment related to the Owen acquisition. As a result, gross margin was 38.8%, 120 basis point increase versus last year. The non cash inventory purchase accounting step up adversely affected gross margin by 90 basis points. Adjusted EBITDA was $77,500,000 an increase of $10,200,000 from the year ago period.

Speaker 4

Selling and marketing expenses increased $10,000,000 to $40,800,000 primarily due to increased investments in marketing growth initiatives and the inclusion of Owen. GAAP G and A expenses were $41,300,000 an increase of $11,800,000 versus last year. The increase was primarily due to higher employee related costs, inclusion of Owen, stock based compensation as well as executive transition and integration costs. Excluding stock based compensation as well as executive transition and integration costs, Q4 G and A increased $8,700,000 to $32,100,000 Additionally, in the Q4 of fiscal 2024, the company incurred costs related to the Olin acquisition of $11,800,000 Finally, net interest income and interest expense was 8 $1,000,000 versus the Q4 of fiscal 2023. The increase versus the year ago period is primarily driven by a higher debt balance due to the Owen acquisition.

Speaker 4

And our Q4 effective tax rate was about 28.3%, slightly higher than a year ago period due to the Owen acquisition. As a result, net income was $29,300,000 versus $36,600,000 last year. Moving on to full year results. Gross profit was $511,600,000 an increase of $58,100,000 compared to the year ago period. The increase was driven by the legacy business due to lower ingredient and packaging costs, partially offset by a non cash $3,200,000 inventory purchase accounting step up adjustment related to the Owen acquisition.

Speaker 4

As a result, gross margin was 38.4 percent, a 190 basis point increase versus last year. The non cash inventory purchase accounting step up adversely affected gross margin by 20 basis points. We're pleased with our gross margin progress in fiscal 2024. However, in fiscal 2025, we anticipate that input cost inflation will be a headwind and result in gross margin contraction of about 200 basis points. Note, this includes Owen as about 50 basis point headwind to total company gross margin.

Speaker 4

Adjusted EBITDA was $269,100,000 an increase of 9.6% versus last year. In addition for the full fiscal year 2024, the company incurred costs related to the Owen acquisition of $14,500,000 Net interest income and interest expense was $21,700,000 a decline of $7,200,000 versus last year. The interest expense component decline was due to a lower term loan debt balance prior to the Olin acquisition versus the year ago period. Our fiscal 2024 tax rate was about 25% and we anticipate fiscal 2025 to be similar. As a result, net income was $139,300,000 versus $133,600,000 last year.

Speaker 4

The next slide provides you with a reconciliation of reported and adjusted diluted EPS. 4th quarter reported EPS was $0.29 per share diluted compared to $0.36 per share diluted in 2023. Adjusted diluted EPS was $0.50 per share compared to $0.45 in a year ago period. Note that we calculate adjusted diluted EPS as adjusted EBITDA, less interest income, interest expense and income taxes. Please refer to today's press release for an explanation and reconciliation of non GAAP financial measures.

Speaker 4

Moving to the balance sheet and cash flow. 4th quarter and full year cash provided by operating activities was about $49,000,000 $216,000,000 Strong cash generation is a hallmark of the company. As a result, at August 31, 2024, the company had cash of $132,500,000 In fiscal 2024, the company repaid $135,000,000 of its term loan and at the end of the year, the outstanding principal balance was $400,000,000 resulting in a trailing 12 month net debt to adjusted EBITDA ratio of 1 times. Capital expenditures in 2024 were $5,700,000 In fiscal 2025, CapEx is expected to be in the $10,000,000 to $15,000,000 range. In fiscal 2025, we anticipate net interest expense to be around 25 $1,000,000 to $27,000,000 including non cash amortization expense related to the deferred financing fees.

Speaker 4

We currently anticipate our net debt to adjusted EBITDA ratio to be about half a turn or better by year end fiscal 2025. Now to wrap up, while early, Retail Takeaway is off to a good start and we believe we're on track to deliver our fiscal year 2025 plans. We continue to execute against our strategic initiatives and are making investments in the business that we expect will strengthen our brands in the marketplace. Owen integration work is well underway and progressing as planned. We expect strong Quest and Owen net sales and retail takeaway growth in fiscal 2025, driven by greater velocity, increased distribution, innovation and marketing investments.

Speaker 4

As Jeff discussed earlier, in fiscal 2025, we're focusing on optimizing Atkins ROIs related to brand investments. This will affect Atkins net sales and retail takeaway in fiscal 2025, but we believe this is necessary to ensure Atkins remains a sustainable and profitable business over the long term. In fiscal 2025, the company continues to expect input cost inflation. Solid productivity and cost savings initiatives are in place that partially offset these higher costs. However, given the unprecedented increase in the cost of select inputs, we anticipate gross margin compression in fiscal 2025.

Speaker 4

Therefore, in fiscal 2025, total company reported net sales are expected to 8.5% to 10.5%. Embedded in that, we anticipate all in full fiscal year 2025 net sales to be in the $135,000,000 to $145,000,000 range. Total company reported adjusted EBITDA is expected to increase 4% to 6%. Note that the 53rd week in fiscal 2024 comparison year is about a 2 percentage point headwind to both net sales and adjusted EBITDA growth in full year fiscal 2025. Lastly, assuming a comparable full year of owned results are included in fiscal 2024 as well as the exclusion of the 53rd week in fiscal 2024, fiscal 2025 is expected to be in line with the company's long term algorithm, specifically net sales growth in the 4% to 6% range and adjusted EBITDA growth slightly greater than the net sales increase.

Speaker 4

Just as importantly, we believe the work we're doing in fiscal 2025 positions us very well for fiscal 2026, which should enable us to achieve top and bottom line results at the high end of our long term algorithm. We appreciate everybody's interest in our company and we're now available to take your questions.

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question and answer you. Our first question comes from the line of Brian Holland with D. A. Davidson.

Operator

Please go ahead.

Speaker 5

Yes, thanks. Good morning. Maybe just starting with some of the recent innovation, specifically looking at Bakeshop and some of the coffee drinks, we seem to be performing quite well. You've talked before about some of the struggles from an innovation standpoint, and then having gone quiet for a little while. Any perspective that can provide about the incrementality of these launches, what you're seeing so far visavis previous innovation cycles at the company?

Speaker 3

Yes, good morning. Let me start with innovation on Quest and specifically Bakeshop. So it's a big platform launch for us. We're encouraged by the early read. If you recall, this is a muffin and a brownie, 10 grams of protein, less than 1 gram of sugar.

Speaker 3

Where it's in distribution, performance is on par or even better, some of our best performing innovation. And certainly feedback from retailers is very encouraging. That platform, it hits on flavor, taste, checked all the boxes, protein, low carb, low sugar. It's also targeting a sizable addressable market, which is sweet baked goods. So in the early innings, still building distribution, but very encouraging.

Speaker 3

Chips, which I'm sure we'll probably talk about on the call, as we recover supply, we continue to drive that. We've got new flavors coming out. It's about a $300,000,000 business today, directly growing at 25% to 30%. Again, and it's a massive addressable market where we see the largest source of volume from mainstream salty snacks. So at a high level, very encouraged by what we're seeing on Quest Innovation.

Speaker 3

What Quest does is it flips the macros on large addressable snacks. And the inroads we've made into salty snacks now with baked, you can believe we're looking around the store identifying other spaces where we can disrupt. And then just to close out on Quest, we have accelerated the launch of the overload bar, which is chock full of inclusions. It's delicious. And so we're also innovating on our core.

Speaker 3

On Atkins, innovation is a key driver of this business performance. And as I've stated on previous calls, when I joined the organization, the state of the pipeline on actions was not where it needed to be, had contributed to the slowdown we've seen in the business. Credit to the team, we did jump start efforts there. The recent slate of innovation in the marketplace is performing well. In the case of Atkins, what we're doing is replacing underperforming SKUs, say at Walmart or a large customer, 1, 1.5 units per week and replacing it with items that these new innovation items that are doing 2 to 2.5.

Speaker 3

So whether that be the Atkins Strong, the gummies, the truffles, Their rule of thumb kind of doubled the velocity performance of the items that they're replacing and it just underscores how critical innovation is on Atkins. And so we have made sure that we're filling that pipeline, so we can continue to bring items to market on Atkins. We're largely looking to replace underperforming items with better items, but it is now a key focus for the business.

Speaker 4

Just maybe demand a little bit of pride just on the Atkins piece, I'd say just an example, if you look at Walmart, I think we they took out 17 SKUs for the fall reset. They replaced them with about 18 or 19 SKUs of innovation. That innovation that dimensionalized what Jeff was saying is turning about 2 times a week as opposed to 1 time a week for the stuff they replace. So it's been a good early, early read on innovation for Atkins.

Speaker 5

Great color. Appreciate that. And then just looking into New Year, New You, and maybe this follows on to the innovation point. I know historically that period can be volatile in both directions. You called out earlier the 2024 resolution season impacted by another category participant and who didn't have adequate supply in 2023, had adequate supply in 'twenty four.

Speaker 5

As you look at the setup into 2025, any sense, whether we're kind of in a more stable backdrop or if there are any heightened competitive issues or somebody out of stock, in stock, whatever. I know some of that we may not know until early 2025. But as we look at fall shelf sets, do we feel like we're in a more stable place than we have been the past couple of years?

Speaker 3

As I look at the 4 shelf sets, I'm very pleased with how we performed on both businesses and Owen as well. To your point, last year, it was somewhat of an anomaly because we were lapping and you made this point, we were lapping a period where we had received outside support due to a large competitor being out of stock. So that was a difficult lap for us. Looking forward to this upcoming New Year, New Year, I'm encouraged by the plans we have in place. We have strong merchandising plans at every customer.

Speaker 3

To your point, it's a competitive category. We don't know what the competition is going to do at this point. But I'm very pleased with how our teams built the plans customer by customer, which should put us in a strong position. But again, you said it, we'll know much more, very much.

Speaker 5

I'll give it to you. Thanks.

Operator

Thank you. The next question is from the line of Matt Smith with Stifel. Please go ahead.

Speaker 6

Hi, good morning. I wanted to dig in a little bit about around the underlying growth outlook for the legacy business in fiscal 'twenty five. I think guidance implies like 3% underlying growth on a like for like basis. But there's a few moving parts here including the Quest capacity improving in the Q1, you get some new distribution in the second half of the year. And on Atkins, you have lower or you're optimizing ROI or optimizing trade spend there.

Speaker 6

So can you help with the phasing of growth for each one of those brands due to the year, given the moving parts here?

Speaker 4

Phasing in terms of quarterly growth?

Speaker 6

Just if there's any unique consideration we should take into account, when we think about Atkins pulling back on trade and merchandising support, is that changing the shape of the decline through the year that we should be considering?

Speaker 4

Yes. I mean, I think if you take a step back and look at the kind of quarters, just in general, I'll just kind of of depending on where your guidance range is, net sales on a reported basis reported should be somewhat similar in Q1 to Q3, up low double digits to maybe low mid teens. Q4 will be flattish because the year ago period included the 53rd week and 11 weeks of Owen. And then EBITDA, depending on where you are in guidance, should be up mid to high single digits on a reported basis the 1st 3 quarters and then down slightly in Q4. From a gross margin standpoint, we're going to benefit from lower input costs earlier in the year, so close to flat in the Q1 and then down about 2.25 basis points the rest of the way.

Speaker 4

That excludes the impact of the one time step up that we talked about on the call. So I don't know if that's what you're looking for, Matt.

Speaker 6

No, it's great. I appreciate that.

Speaker 3

The only added color I would just give you is on Quest chips, which we talked about in the scripted remarks. We had been trending just to give you an idea of how this should flow. We've been trending in the $4,750,000 to $5,000,000 per week range in measured channels. Because of the stock outs, we ended up closer to $4,000,000 And we expect to get that business back in the $5,000,000 per week range starting the end of October. We've got a great top end partner, but 2 sites operational.

Speaker 3

We've got a test with a large club customer coming in. So if you look at the consumption trends and you think how is that going to flow into the New Year, you should probably look at that as adding 2, perhaps 3 points to Quest growth versus what you're seeing right now.

Speaker 4

The other thing Matt I'll say is related to Atkins POS, I think you were kind of poking around there. I think you're going to see that a little softer in January through August and where it's trending for the 1st 6 weeks of the fiscal year. We have not seen the cuts in the underlying investments really that starts in kind of October ish and then it kind of continues through fiscal year. So you'll see softer as we go through the year versus where it is today.

Speaker 6

Great. Thank you for all the detail. I'll pass it on.

Speaker 3

Thanks, Matt.

Operator

Thank you. The next question is from John Anderson from William Blair. Please go ahead.

Speaker 7

Hey, good morning, everybody. Thanks for the questions.

Speaker 4

Good morning.

Speaker 7

I wanted to ask Good morning. Good morning. I wanted to ask about the point of sale assumptions for fiscal 2025 by brand. It looks like the assumptions that you communicated for both Quest and Atkins are kind of in line with recent scans, but quite a bit lower for Owen. It looks to us like Owen has been running up closer to triple digits and I know you've kind of communicated 20% to 30%.

Speaker 7

Can you just talk a little bit about the dynamic there for Olin in 2025? Is it more challenging comparisons or is there a certain element of conservatism baked in as it's a new brand for your business? Thanks.

Speaker 3

Yes. And I appreciate the question. We continue to be excited about this acquisition, expands our presence in the fast growing shake category, fastest growing multipack protein shake and measured channels, the last 1326. And we purchased this business because it reaches a new consumer, both looking for plant and clean label, when clear and obvious cost synergies. To your point, if you look at current performance, it's exceptionally strong.

Speaker 3

It's up around 80% all outlets. Sam's Club is a big driver. You're seeing significant growth in every customer. So it's not just one customer. Our focus right now on this business is driving the core.

Speaker 3

So expanding the number of doors, perhaps adding a larger pack and then integrating the business, delivering on the synergies, which will hit in 2026. In terms of why we have a lower growth number, the in fiscal 2020 and now fiscal 2024, we saw significant growth in distribution as they got into new stores and channels. In fiscal 2025, there's still distribution opportunities, but as I said, it's more around filling voids, pack sizes, and we're lapping some pipes. So the recent growers is very much driven by a significant distribution push. We'll continue to look to fill voids, look to drive increased pack sizes, but it won't be at the same level that we have currently seen the benefit of.

Speaker 3

And I

Speaker 4

think in the first half of the year, you're going to see O and M consumption trends higher than they are for the full year. We really lap that stuff in the second half of the year.

Speaker 7

Thanks. That's helpful. Thanks for that. Just a follow-up on marketing. I know you've tweaked, I think, the messaging around some of the marketing campaigns for Atkins.

Speaker 7

And then you have some, I guess, in market data on Quest and it's basically cheating messaging. Can you talk about the kind of the state of the marketing programs today and your sense of the ROI you're getting there? And then your overall level of marketing spending, are you at the right level now by brand? Thanks.

Speaker 3

Yes. Let me start with Quest. In fiscal 2025, we will have a full year of this basically cheating campaign. I've been doing marketing for over 20 years and it's very rare to see a campaign drive a significant short and long term increase in sales. That's exactly what happened with the Quest campaign.

Speaker 3

And where we really saw that was on chips, an almost instant significant lift in consumption. Candidly, that's what caused us to have to revisit the second site on chips. And so we're excited to see a full year benefit of that. And in fiscal 2025, you'll see it over an increase 20% increase in advertising on Quest. And getting the Quest advertising levels up to that 8 ish percent range, which is probably a good zip code.

Speaker 3

On Atkins, we've recently dropped new advertising into the market. It's still early that advertising didn't really start until September. The advertising more squarely positions Atkins as a weight brand and emphasizes our unique macro nutrient profile to support that. What I will say is now testing, neuro testing, it was one of the top boring ads that Nielsen has seen and particularly the spot that referenced the new weight loss drugs. So I'm encouraged and optimistic.

Speaker 3

It's a little early to tell, but I think what we've learned what we're learning from this advertising is going back to the core promise of the brand, which is weight wellness, putting it in a culturally relevant context, for example, these new weight loss drugs and being very clear that we are the solution to consumers, the 60% of consumers who want to lose weight. So now I'll close by saying one of the areas that we are throttling back on actions is level of marketing, which had gotten ahead of where we wanted it to be. Most of those cuts have come in non working, but there will be some impact, probably mid single digit impact to the actual media impact.

Speaker 4

Yes. And just in terms of level of spend, I think if you look at 2024 results, we're probably low 9s as a percentage of sales. We'll probably be mid to low 8s overall as a company. But as Jeff said, a big chunk of that is actually non working media that we are marketing that we cut back. So I think the level of spend we think is right for the business as of right now.

Speaker 4

We'll continue to evaluate that and we'll probably look at that further as we get into 2026. I just want to go back on the Owen thing in terms of where we are for next year for growth rates. It's a 20% to 30% growth rate. Just to dimensionalize it a little bit, if we grow 20% to 30% over the next 3 years, we kind of double the business. So it's not like it's an insignificant growth on the overall business.

Speaker 7

Absolutely. Thanks so much.

Speaker 4

Thanks, Jim.

Operator

Thank you. The next question is from Alexia Howard from Bernstein. Please go ahead.

Speaker 8

Good morning, everyone.

Speaker 4

Good morning, Alexia.

Speaker 8

So just sticking with Atkins, it sounds to me as though given the top line headwinds that you've mentioned, the pullback in promotion, a bit of a pullback in marketing, the possibility of distribution losses. Are we basically saying at this point, we shouldn't expect an inflection and back to positive sales growth organically until fiscal 2026? I

Speaker 3

mean, that's fair. So we've made these difficult, but they're the right decisions to right size investments. The focus has been on very low ROI spend on marketing, the predominant of the cuts have come in non working, but there will be a small impact to media. And in more space constrained channel like club, we certainly expect to lose a slot or 2. That will have a volume impact in fiscal 2026.

Speaker 3

And that is despite the positive signals we're seeing from the revitalization plans, whether it be the new innovation that is performing well, new advertising, it's early, but I'm encouraged. We've got new packaging coming. But the net effect of that, Alexia, is that we should expect we are expecting negative accelerated decline on Atkins. But you have to remember that most of that choices we've made, including getting out of our breakeven Canada business. Looking forward, our thinking is just to continue we'd like to see sequential improvement that we have to address these issues and we've decided to do it now.

Speaker 4

Yes. I think just to mention a little bit, I think if you look at the guidance we gave on consumption kind of high single digit decline on Atkins, basically we break it down. We think base velocity declines are going to improve versus Q4. Effectively innovation is going to offset distribution losses effectively in the club channel. We're at the next phase where we assess the investment levels.

Speaker 4

We're eliminating, as Jeff said, unprofitable investments, discontinuing our breakeven business in Canada and half of the expected decline is basically going to be decisions we make overall. I also point out that all elements of the plan are not in the market until the end of fiscal 2025. So as we continue to get more innovation like we said for Walmart as an example for this fall, we're going to replace lower performing SKUs which should help the business overall. So I think it sets us up nicely for 2020 6, but there will be some impact in 2020.

Speaker 3

Yes, the goal on Atkins is a relevant, modern, contemporary brands that is sustainable and profitable and one that we can bid on for the long term.

Speaker 8

Perfect. And then as a follow-up on Quest, are you able to quantify the potential benefit from the club customer rollout? I think you said that's probably in the second half of the fiscal year. Any views as to how much distribution you'll gain as a percentage? Or how many percentage points on sales that might give you on the Quest brand?

Speaker 8

Thank you and I'll pass it on.

Speaker 3

Yes. So, Alex, a little reluctant to share specific growth numbers or dollar numbers by customer. With this we've had a small, very regional test with this customer, mostly on the West Coast. And we're very pleased with the performance based on that performance. We have now a nationwide test.

Speaker 3

Now it's a significant customer. So it's not an insignificant amount. But I still view it as a test and we still have to prove it out. But I'm sure you can appreciate if we perform in this test, the upside potential to our business starting with chips is significant.

Speaker 8

Great. I'll pass it on. Thank you.

Speaker 4

Thanks, Mocter.

Operator

Thank you. The next question is from the line of John Baumgartner with Mizuho Securities. Please go ahead.

Speaker 1

Hi. This is Isabella on for John. Thank you for taking our question. So in terms of the Quest Bars business, looks like the brand has recently faced some elevated competition from increased distribution and discounting from some smaller brands in the category. So from this competition, what have you learned about Quest Bars?

Speaker 1

Has it given you any reason to think maybe differently about the relative demand drivers for the brand? And what are your expectations for Quest Bars revenue in fiscal year 2025? For example, is it reasonable to think like mid single digit growth for the full year is achievable? Thank you.

Speaker 3

As we look at Quest Bars, obviously, it's a significant part of the business. It is a more mature business versus, say, chips or baked goods. But if you look if you take a step back and look at the overall protein bar category, that category has increased around 4% to 5% in Q4. Quest bars were up, not quite at that level. And recall that when we think about the bar category, we're focused on protein bars, not the better for you bars, but high protein bars.

Speaker 3

So the overall bar category is pretty healthy, up 4% or 5%. We're not quite keeping pace with that. As the leader in the category, that is unacceptable to me. It's unacceptable to Team Quest. In response, we have firstly, we are accelerating the launch of the Overload platforms I mentioned earlier, pulling that forward to February.

Speaker 3

This is a category that responds to new news. And this is an incredibly delicious platform, chock full of inclusions, and we'll strongly support it with it's basically cheating marketing campaign. We are and we did acknowledge that we have seen competition in this space. That's not new in the context of the overall bar category, but we have seen some competitors come in and we are going to also respond to that as you would expect as the leader by sharpening some price points in key channels. And I would contest also that we expect and probably are seeing some cannibalization, format of cannibalization as we launch bars, as we launch chips.

Speaker 3

Highly, highly incremental to the business, but likely not 100% incremental. But rest assured, bars are big part of the Quest business. We're the market leader and we're going to act that way. We are going to defend our house and we're going to do what Quest does best, which is bring world class innovation and just step up our game there.

Speaker 4

Yes. I think just as you think about the year, I think 2025, the plan for bars right now is sort of low single digits to flattish overall for Quest as we kind of get into the year. I would say this, the headwind we're going to have in the Q1 would be the spend we're having on these sharpening the price points. However, I look at consumption quarter to date in the 1st 6 weeks of the quarter including all the outlet were up 3% in bars overall for Quest. So we're making some progress there.

Speaker 4

As Jeff said, not exactly where we want to be yet, but feel like we're kind of bouncing back from where we were in Q4.

Speaker 1

Great. Thank you for the color. And then for the Owen business, what are you learning about the business? Is it taking an appreciable amount of sales from the few other plant based shakes in the category? Or is it sourcing more volume from dairy protein?

Speaker 1

And how do you think about Owen's ability to bring incremental consumers to the category once you bring to market? Is there anything you can take away from the experience of other plant based shakes brands that have already begun to scale ahead of O. N? Thank you.

Speaker 3

Yes. So as I said earlier, we continue to be really excited about this acquisition. It's delivering on everything we saw in the business. As we said when we announced the acquisition, obviously, this gets us into the plant's clean label segment, which is growing about double the rate of the total shakes category, which is very healthy category. What really excited us about this acquisition though was, Owen is increasingly pulling in consumption from more mainstream consumers.

Speaker 3

And when we dug underneath that, we did our own research that showed that on this on pure taste study, and we did a comprehensive taste study, that Owen has separated from plant based shakes and has gotten much closer to dairy based shakes. And this explains why they're pulling in consumption from consumers who want to add a cleaner plant based option into the rotation. That total addressable market obviously is significant and that we see as upside. So become the clear leader in plants and increasingly grow through attracting consumption from more mainstream consumers. So that's what we saw in our research, and we continue to see it in the results.

Speaker 3

That's why they're up 80%. What I will say is, you should expect us to right now, we're focused on driving the core, but you should assume that when we look at the Quest playbook on this business and how can we extend Owen outside of shakes. We've started work on that. Combining our R and D organizations creates a very powerful and very, very talented team. And so you should assume that we want to continue to grow this brand beyond just core shakes.

Speaker 3

More to come, but that's our thesis and I'd look to the Quest playbook and say, yes, it's some high derivative on how we're going to run on.

Speaker 1

Great. Thank you so much.

Operator

Thank you. Ladies and gentlemen, we take the last question from the line of Jim Solaria from Stephens Inc. Please go ahead.

Speaker 7

Hey guys, thanks for fitting us in. Appreciate all the detail on Owen. Wanted to ask a follow-up there. If you continue to see household adoption and higher velocities, could

Speaker 3

you just give us a

Speaker 7

sense for what the capacity is for 2025, especially in light of some of the success you saw with the Quest ships leading to capacity constraints there? Is there kind of an upper bound for Owen for what you guys can do for 2025?

Speaker 3

Yes. I mean, short answer is no. We don't. There are no capacity issues near term or even medium long term for Owen. I will say one of the benefits of bringing them into simply network as we have significantly helped them expand their capacity.

Speaker 3

And in this industry, yes, capacity was constrained, but a lot of new capacity either come online or coming online. So capacity is not an issue at all.

Speaker 4

And I'd also say, as we look at it, we think there's an opportunity and we're working on it right now as we optimize that network for RTDs for the overall business for Quest, Atkins and Owen. I think there's an opportunity from a cost savings standpoint. We wouldn't see that fiscal 2025, but we are looking hard at that and that could be a meaningful synergy for us.

Speaker 7

Great. And then one final question. Given that you guys have already levered the balance sheet back down to just one times, just any thoughts on capital allocation into FY 2025 given that it sounds like you guys have a pretty detailed plan on marketing, but I would expect there's going to be some cash up left over. So any thoughts on buybacks or anything there?

Speaker 4

Yes. I mean, let's just take a step back. I think cash generation is a hallmark of the company. I mean, I think we had a fantastic year last year. Cash from operating activities $215,000,000 should be strong again this year.

Speaker 4

We have over $100,000,000 in cash on the balance sheet right now. So we continue to evaluate what the best way to return cash to our shareholders is that look at debt pay down, we look at share repurchases, we look at M and A. So we'll continue to evaluate that and we'll look at opportunities to buy back shares and really finalize and continue to fine tune our capital allocation strategy as we get into the year.

Speaker 7

Great. Thanks guys. I'll hop back in queue.

Operator

Thank you. Ladies and gentlemen, this concludes our question and answer session. I would now hand the conference over to the management for closing comments.

Speaker 2

Thank you so much for joining us today. I'll be available for any follow-up calls you may have and we'll be look forward to updating on our Q1 results in January.

Operator

Thank you. The conference of Simply Good Foods Company has now concluded. Thank you for your participation. You may now disconnect your line.

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